Claire's Domestic Growth No Afterthought

Shares of Claire's Stores(NYSE: CLE), a mall-based retailer of low-priced fashion trinkets for teens, rose about 10% in trading today after the company announced an agreement to buy the Afterthoughts accessory chain from Venator Group(NYSE: Z) for about $250 million.

Afterthoughts operates 768 fashion accessory stores in regional malls in the U.S., Canada, Puerto Rico, and the Virgin Islands; Claire's currently operates more than 2,200 stores in North America, Europe, and Japan. Claire's expects a one-time, pre-tax charge of between $6 million and $8 million in the fourth quarter because of the acquisition and anticipates the deal will boost earnings beginning in fiscal 2001.

"This gives Claire's Stores an additional platform for growth in the United States," Claire's Chairman and CEO Rowland Schaefer said in a statement. "The acquisition will also give Claire's greater buying power ... [and] the larger store base will further allow us to leverage our [selling, general, and administrative] expenses through better utilization of our distribution and administrative functions."

Specific details about Afterthoughts' business weren't broken out in the press release or Venator's most recent annual report, although the official statement did mention some broader themes investors should note.

Afterthoughts customers are typically between 14 and 19 years old, Schaefer said, providing a natural avenue toward which to funnel the Claire's Accessories core customer, generally between 8 and 14 years old. The stores, which range in size from 1,000 to 2,000 sq. ft., fit right in with Claire's average and strive for the feel of a "social destination" that Claire's shoots for at its accessories stores. (The company also operates a comparatively small chain of apparel stores known as "Mr. Rags.")

And Afterthoughts has worked to shorten purchase response times with its suppliers, allowing it to respond quickly to fashion trends -- just like Claire's. For another recent Foolish take on Claire's business, click here.

This really looks like a solid deal for Claire's, which wants to continue portraying itself as a growth story despite its very large network of domestic accessories outlets.

But much of the growth opportunity that the company has trumpeted lately has been overseas, particularly across the Atlantic: "One of the things which is misunderstood with Claire's is our growth opportunities," Vice Chairman Marla Schaefer said in a recent Wall Street Transcript interview. "We feel that we have plenty of growth [potential] in Europe. We see the opportunity for over 2,000 stores in addition to the current store base."

But this deal gives the company new domestic business, a new brand to grow, and a new means to leverage its dedicated American customer base -- and in its core competency, accessories (which it dominates), rather than in the hypercompetitive apparel business. Investors' enthusiasm for the purchase today appears well-founded.
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